Hain Celestial In Focus - Research Report

(RTTNews) - This organic and natural products company has experienced strong compounded annual growth over the last four fiscal years with its net sales growing 25% and adjusted income from continuing operations over 30%.

The Company In Focus ...

The Hain Celestial Group Inc. (HAIN) manufactures, markets distributes, and sells organic and natural products, under brand names which are sold as "better-for-you" products. The company has again been ranked as one of FORTUNE's 100 Fastest Growing Companies, moving up to No. 61 in 2014, in recognition of the tremendous growth in the company's revenues and earnings over the last three years.

The company's product lines include natural products, products made with organic ingredients and certified organic products. It primarily sells its products in the following categories: grocery; snacks; tea; and personal care.

The largest chunk of revenues is contributed by Grocery products, which accounted for about 77% of the company's top line in 2014, 74% in 2013 and 69% in 2012.

Snacks form the next major line of revenue, accounting for about 12% of net sales in 2014, 13% in 2013 and 15% in 2012.

Tea and personal care products are more or less equal contributors to the revenue.

Tea products accounted for about 5% of net sales in 2014, 6% in 2013 and 8% in 2012, while Personal care products accounted for about 6% in 2014, 7% in 2013 and 8% in 2012.

Geographic Footprint...

In the last three years, International operations have expanded to become a larger component of revenue.

In 2014, International operations represented about 40% of sales, growing from a 37% contribution in 2013 and 28% in 2012.

Still, the United States is the largest contributor, accounting for 60% of total sales in 2014.

Growth Through Strategic Acquisitions

The company strives to grow through strategic acquisitions. During fiscal 2014, the company completed two strategic acquisitions in new categories. It kicked off its fiscal 2015 in July by purchasing the remaining 51.3% of Hain Pure Protein Corp. or HPPC that it did not already own.

HPPC reported about $230 million in net sales for fiscal 2014. This is expected to translate into EPS accretion ranging from 3 to 5 cents per share in fiscal 2015 for Hain Celestial. It paid $40 million for the 51.3% stake in HPPC, which is a leading antibiotic-free and organic poultry company offering a full range of fresh and frozen FreeBird chicken and Plainville Farms turkey and private label products in the United States.

In 2014, the company reported record net sales of $2.154 billion, a 24% increase from last year, thanks also to its accretive acquisitions during fiscal 2014 - Tilda Ltd. in January and Rudi's Organic Bakery Inc. in April.

Tilda is a leading premium 100% branded Basmati and specialty rice products company. At the time of acquisition, Hain Celestial said it expects Tilda to add $0.06 - $0.10 per share to its adjusted earnings in the second half of fiscal 2014. Tilda generated revenues of $190 million in net sales for 2013.

Rudi's Organic Bakery Inc., a leading organic and gluten-free company with facilities in Boulder, Colorado. The company paid $61.3 million for Rudi's. In calendar year 2013, Rudi's generated approximately $60 million in net sales for calendar 2013, and is expected to be accretive to Hain Celestial's earnings in fiscal year 2015.

Research and Development

The company also seeks growth by introducing new products and improving existing products through Research and Development. The company's research team also conducts value engineering to maintain competitive price points.

Company-sponsored research and development activities spending has more than doubled to $10.0 million from $3.9 million in 2012.

Hain Celestial also seeks to enhance cash flows and margins through its Stock Keeping Unit or SKU rationalization program, which has resulted in the discontinuation of numerous lower-margin or low-turnover SKUs.

Quality Assurance Through Manufacturing & Co-Packers

During 2014, 2013 and 2012, about 57%, 55% and 48%, respectively, of the company's revenue was derived from products manufactured at its own facilities. The company derived 43% of its revenue in 2014, 45% in 2013, and 52% in 2012, from products manufactured by independent co-packers. The company says it audits its co-packers regularly through its our quality assurance staff to ensure compliance with Good Manufacturing Practices or GMPs, as well as its own stringent standards.

Customer Concentration

The company's largest customer, United Natural Foods Inc., a distributor, accounted for about 13%, 15% and 18% of its consolidated net sales for the fiscal years ended June 30, 2014, 2013, and 2012, respectively, which were primarily related to the United States segment.

A second customer, Walmart and its affiliates Sam's Club and ASDA, together accounted for about 11% and 10% of the company's consolidated net sales for the fiscal years ended June 30, 2014 and 2013, which were primarily related to the United States and United Kingdom segments. No other customer accounted for more than 10% of its net sales in the past three fiscal years.

Latest Q1 Results

The company reported a lower profit for the first quarter, hurt by higher expenses. Meanwhile, revenues rose from last year as the company's business continues to benefit from strong growth trends in the organic and natural, better-for-you segment of consumer packaged goods.

Both net sales and adjusted earnings were up solid double digits for the 16th consecutive quarter, with another quarter of high single-digit organic growth.

Net income was down at $18.85 million or $0.37 per share compared to $27.65 million or $0.57 per share last year. Excluding certain items, the company earned $0.68 per share.

Analysts polled by Thomson Reuters expected the company to report earnings of $0.67 per share. Analysts' estimate typically exclude certain special items.

Quarterly sales increased to $631.3 million from $477.48 million a year ago. Sales growth was driven by increased distribution and consumption, as the company's existing portfolio of brands continued to perform well, while the acquisitions of HPPC, Rudi's and Tilda increased its sales by $131 million in the first quarter.

Selling, general and administrative expenses rose to $90.92 million from $73.58 million last year.

Annual Financial Data

Net income for fiscal 2014 was $139.8 million or $2.80 per share compared to $114.6 million or $2.41 per share in 2013, $79.2 million or $1.73 per share in 2012, $54.9 million or $1.23 per share in 2011, and $28.6 million or $0.69 per share in fiscal 2010.

Net sales increased to $2.15 billion in the fiscal year ended June 30, 2013, from $1.73 billion in 2013, $1.37 billion in 2012, $1.10 billion in 2011, and $890.0 million in fiscal 2010.

In fiscal 2014, the company generated record operating free cash flow of $143.2 million as it delivered over $50.0 million in worldwide productivity savings under its multi-year plan.

Future In Focus...

For fiscal 2015, the company continues to project total net sales in the range of $2.725 billion - $2.80 billion, an increase of about 27% - 30% as compared to fiscal year 2014. Earnings per share is still expected to range between $3.72 and $3.90 per share, an increase of 17% - 23% as compared to fiscal year 2014.

Wall Street analysts have a consensus earnings estimate of $3.83 per share on revenue of $2.75 billion for fiscal 2015.

The company's fiscal 2015 guidance includes the July 2014 acquisition of Hain Pure Protein Corp. with about $230 million in net sales in fiscal year 2014, which is expected to be accretive by $0.03 - $0.05 per share.

Industry and the Company

Dallas, Texas-based market research company and consulting firm MarketsandMarkets says that demand for organic food products is growing rapidly, especially in the developed economies such as North America and Europe. The research firm estimates that the market for global organic food and beverages in 2008 exceeded $51 billion and is expected to have a CAGR of 12.8% from 2010 to 2015, reaching $104.5 billion by 2015.

Increasing health concerns among people, awareness about the harmful effects of pesticide residues in food and its impact on health, rising food scarcity, government support through various subsidies, and increasing trend of standardization for organic foods act as the driving force for the growth of global organic food market.

Unlike other operators, by sourcing its ingredients directly from suppliers and not through brokers, Hain Celestial has been able to work with farmers to actually build-out their supplying capabilities to meet the growing demand.

John Carroll - EVP & CEO, Hain Celestial United States, said:

"We don't do a lot of sourcing via brokers which is where most other companies in our space do. They use brokers to go get ingredients. We have long term relationships, whether it be our key tea business sourcing herbs in Asia, whether it be us sourcing exotic root vegetables in South America. These are relationships that we have cultivated, no pun intended, over a long period of time and have been able to work with these farmers and tell them where our demand is going so that they actually build out their capabilities to supply us."

The company seems well positioned to capitalize on the increasing global demand for organic products through distribution gains, strategic brand investments, new product innovation and accretive strategic acquisitions in complementary growth categories and geographies.

The downside is it operates in a very competitive space, where barriers to entry are not formidable. Besides, food business is governed by stringent safety standards and is always sensitive to the possibility of recalls.

In August this year, the company initiated a voluntary recall of certain lots of MaraNatha almond butters and peanut butters, Arrowhead Mills peanut butters and specific private label nut butters, which negatively impacted gross margin by about 30 basis points. As a result of this voluntary recall, the company accrued costs of $6.0 million as of June 30, 2014.